The Hindu Business Line : Introspection time for audit profession

The ICAI needs to consult senior members of the profession and devise a strategy, not just for damage control, but to meet the heightened expectations of the public.

Raghuvir Srinivasan

It reminds you a bit about the story of Rip van Winkle. “The disciplinary committee of The Institute of Chartered Accountants of India (ICAI) has concluded,” said a report in this newspaper on Tuesday, “that the chartered accountant who audited and certified the balance sheet of Global Trust Bank (GTB) for the financial year 2000-01 is guilty of professional misconduct.”

GTB went belly up in 2004 and the ICAI initiated disciplinary proceedings against the auditors almost immediately. And then, like Rip van Winkle, it went off to sleep. Chances are that it might still have been sleeping were it not for Mr Ramalinga Raju rudely awakening it from its slumber, a good 15 years before it could equal Rip van Winkle.

Mirth aside, it is indeed galling to note how fast (or how slow?) the disciplinary process of the ICAI works. And importantly, how much scope there is in the system for vested interests to delay the process.

It will not be an overstatement to say that had the ICAI cracked down on the auditors who were guilty in the GTB case, then Satyam, probably, may not have happened at all. The audit firm in the centre of controversy in both cases is Price Waterhouse and/or its affiliates. Indeed, one of the partners of Price Waterhouse who has been taken into custody is the same gentleman who oversaw the GTB audit.

Denial mode

Mercifully, the disciplinary proceedings under the new regulations are much simpler and quicker but they apply only to cases registered after November 17, 2006. The GTB case will, therefore, continue to be heard under the old rules.

That it took a scam of Satyam’s magnitude to galvanise the ICAI to act on a case, of almost equal enormity, where one of its members was found wanting of worthy professional conduct, is sad indeed. The problem with the auditing profession is that it appears to be in denial mode on the role of auditors, whether in the GTB case or in the Satyam scam, even in the face of compelling evidence to the contrary.

The attitude seems to be that “frauds will happen even when the highest audit standards are observed”. The trouble with this, though, is that the only person who has access to the books of accounts of a public company, apart from the company itself, is the auditor.

And the public expect him to uncover or discover wrongdoings by promoters and report it to shareholders. The auditors, in other words, are the eyes and ears of the disparate shareholder community.

Now, if the auditor professes helplessness in tracking down obvious cases of fraud, the question that arises is: why have him at all? This is exactly what most common people are asking, post-Satyam.

Faced with this, the standard response of the audit community is that old clichéd extract from a judgement by an English judge in 1896 that “auditors are watchdogs, not bloodhounds”.

Indeed, this is the first lesson that students who enter the profession learn. But the problem is that the world has changed unrecognisably from the days of that judgement. Back then, we did not have companies as we know them now with large, widespread and disparate shareholding; we did not have real-time stock trading on electronic screens, where money is made and lost in seconds; we did not have complex financial products such as derivatives; and finally, we certainly did not have businesses of a size and complexity that now exist beyond national boundaries.

Stronger role

In today’s world, the auditor, rightly or wrongly, is expected to be a bloodhound, follow the mildest scent of a fraud and sniff it out into the public domain.

For this, the audit tools and techniques employed may need a review. Fraudsters, it is granted, are always a step ahead, but the least that the audit profession can do is to make an attempt to match them.

The ICAI should also probably think in terms of a code of conduct for its members who are in service, just as it has one for those in practice. A promoter who hopes to swindle funds cannot do so without the knowledge of the company’s accountant.

How about a code of conduct that will require the accountant, where he is a member of the ICAI, to blow the whistle when he sees a potential fraud? Just as an auditor is pulled up for negligence, an (chartered) accountant employed in a company who fails to spot or stop a fraud should be hauled up too.

Clearly, this is introspection time for the profession. The ICAI needs to put on its thinking cap, consult senior members of the profession and devise a strategy to not just repair the dent but also find a way to meet the heightened expectations of the public.

For starters, it could consider reviewing the language of the audit report attached to company balance sheets and make the language positive and assertive. In its present form, it appears rather vague and designed to ensure that no liability sticks on the auditor.

The process of change has to begin with the humble acceptance that the profession has been found wanting in the present context. Minus that acceptance, there can be no movement forward.